Mobility Mondays

Our Global Mobility experts recognise the complexities faced by organisations and employees.
Our focus is to simplify. 

Global Mobility has been referred to as the decathlon of HR/Reward. So many technical disciplines have to collaborate to deliver the right employee experience, compliance and cost management. There is a lot of technical jargon in the area and we would like to demystify some of this.

We would welcome your input including any questions you would like us to answer.

Question of the week

Commuters
Monday 18 March

Dinesh Jangra
Dinesh Jangra

I often hear organisations talk about how they opt for a commuter role rather than an expat or relocation move because it keeps things simpler. This expectation however is often misplaced as commuter roles have the potential in some ways to be more complex from a compliance perspective (payroll, tax and social security). It’s important for Mobility / HR and Tax professionals to understand why so they can guide the business accordingly.  

What is a commuter?

Let’s define what we mean by commuter. A commuter is an employee who lives in one country, is employed there but is required to work regularly in another country. There could be a weekly or a monthly pattern but what’s key is they are required to be outside their home country on a regular basis – it’s not just a business trip. No relocation is involved, the family, the family home and payroll remain in the home country.

For many reasons commuter roles have definitely been on the rise in recent years. Some of the key reasons include roles becoming more cross border in nature and the perception that commuter roles are viewed as cost effective alternatives when compared to expat roles. Brexit has been another trigger – presence is required in countries for regulatory reasons but the employee is settled at home (UK) so starts to commute.

Why can they be more complex? 

To understand why a commuter can be more complex from a compliance perspective we probably need to understand why a typical expat assignment can be less so. In an expat scenario, or even a permanent transfer, there is usually a relocation. That relocation, family and home moving, often means the employee breaks tax residency in the home country. As a result, tax and payroll can over time primarily be a focus in the host country.

Commuters often stay tax resident in the home country – so there is payroll, income tax and social security potentially in both countries. Once worked through, cross-border social security rules can mean the social security is due in one country only but you are then still left with dual payroll and income taxes. The result is payroll gets very complex with specialist knowledge and adjustments being required to prevent double tax withholding and the income tax filings and liabilities for the employee get ever more complex.

The home country employer may also need to register in the host country for social security or payroll taxes. There are also related considerations around immigration, employment law, corporate tax permanent establishment and regulation such as posted worker directives to consider too. If that wasn’t enough to think about, it’s also necessary to check how travel, accommodation and subsistence costs are taxed in both countries. These are very often reimbursed or paid for directly by the employer so if they become taxable there can be hidden tax liabilities that can be unwelcome surprises and costs.

What tips are there?

There are solutions and methods to manage the complexities around payroll and taxes but early analysis is absolutely key. This way you can help the business understand the potential changes in obligations that can be triggered. The analysis may also help in identifying the compliance triggers in the host country, for example a certain number of days worked each year. The arrangement can then be structured or managed to either avoid tripping those triggers or at the very least the business is fully aware of what it is signing up for with the related additional complexity and costs.

Previous questions answered

US: State to state compliance
Intra-country mobility compliance
Mobility and tax professionals will be aware that as employees work across borders they may give rise to changes in compliance obligations such as payroll and income tax filings. What’s not always as well understood is that intra-country mobility can also do the same. Working in different places in the same country can change compliance obligations for the employer. In the UK, we have Scottish Income Tax as an example but the best example of this is probably the USA.US state to state complianceThe US Tax and payroll system works in two parts. There is Federal tax as well as State and Local Taxes often referred to as ‘SALT.’ If a domestic employee, or even a globally mobile employee, is working in more than one US city or state it can mean payroll and income taxes to those cities or states are triggered. Employers need a process to monitor where their employees are working to mitigate risk.Employees working outside of their 'home state' can give rise to payroll related compliance challenges for their employers as well as personally add to their own individual tax compliance burden … with a need to file extra state or city income tax returns. These employees are 'non-resident' because although they work in one state they live in another. As businesses expand, using 'just in time' service delivery methodology and broaden the use of flexible work arrangements, the employers’ vulnerability to payroll tax compliance gaps grow.
Why is State Payroll Tax so complicated?  
Well, let’s start with the 50 state jurisdictions plus the District of Columbia.D.C. does not tax non-residents and nine states do not impose individual income tax on wages  which leaves us with 41 state tax jurisdictions that apply their own sets of rules to non-resident taxation.The rules then vary from taxation on day one as applied by 24 states … to taxation based on the number of days per individual, the number of days by legal entity or varying wage thresholds to be applied to an employee in a quarter or calendar year. Once you have these rules sorted out, we then have to consider the Reciprocity agreements between certain states to see if there is an overriding agreement  that presents taxation to the 'resident' or 'home' state.  Now that you get the gist of the rules, or at least how complex they can be – let’s look at implementation.For a select few sectors that use time and attendance/ timesheet systems (like professional services) then perhaps daily physical work location details are readily available? If so, it’s then a matter of applying the rules for each of your employees. Alternatively, if the physical work location data does not exist, alternatives include employee self-reporting, analysis of preferred or travel suppliers’ data as well as GPS smart phone related apps that can help facilitate the process. Gather the data, apply the tax rules and then integrate with company policies that reflect your corporate culture.While today’s rules combined with the expanded use of a mobile workforce present payroll tax compliance challenges there are cost effective solutions for employers to mitigate their compliance risk. Another key point is having a solution in place to track employees’ workdays can of course can enable compliance but it can also be proactively used to prevent that same compliance from being triggered.

Note: The Mobile Workforce State Income Tax Simplification Act of 2019 was reintroduced with bipartisan support last week with the aim to universally apply a 30-day taxing threshold for non-residents working outside of their home state. Similar legislation aimed at State Tax Simplification was introduced in 2007, 2009, 2015 and 2017. 
What are foreign tax credits?
For some, this is an area where just the mention of it can start to cause confusion. I am hoping therefore this is a useful write up. First of all, I will mention that often an abbreviated form - just FTC is used. Tax experts often refer to foreign tax credits as ‘FTCs.’So what are FTCs and why do they occur?When employees work across borders they may trigger taxation in more than one country – the home as well as the host country (for example). Let’s call home (Country A) and host (Country B). When taxation has been triggered in both countries income tax may become payable in both locations. It is not uncommon that one of the two countries (say Country B) taxes all of the income including the income taxed in Country A. In effect we have what is known as double taxation. Income tax is due on the same income in two different countries. Income tax is due in Country B on everything and in Country A as well (usually on a smaller portion of the income).Double taxation, of course, would be unfair and would be very costly and demotivating to globally mobile employees. In a number of scenarios, such as where tax equalisation applies, the tax liabilities are transferred to the employer. This double taxation then becomes a potential cost to the employer.Tax systems recognise that double taxation would be unfair. For example, if Country B charged tax of 25 on income of 50 and then Country A charged tax of 15 (on that same income of 50), then we have total tax of 40 or a tax rate of 80%. In response to this tax systems usually provide some mechanism to remedy this double taxation. One such mechanism is foreign tax credits. Where allowed, a country would compute the tax liability due but then give a “credit” for the tax paid in the other location.Developing the example we had earlier:Country B tax is 25Country A tax is 15Country B tax due is 10, (25 -15).Country B has given a “foreign tax credit” so that the Country B tax due is reduced and double taxation is remedied. It’s not exactly this simple as the workings and calculations are significantly more complex and involved but this illustrates the point,Foreign tax credits are quite common in the area of mobility because often tax is driven by economic activity (as one example) and the employee is working in more than one country. Another cause can be compensation that is earned over multiple years – bonuses or equity compensation as examples. The employee may have worked in more than one country during the period to which these earnings relate so more than one country taxes and one of the countries taxes it all.The double taxation issue can also be very relevant for payroll, after all no employer wants to pay payroll taxes on the same income in more than one country. Tax experts usually find ways of resolving this but it requires detailed knowledge of local and cross border payroll and mobility taxes.In general, foreign tax credits are usually best left to be managed by tax experts as they can get complex quickly. That said, it is important for those working in the area of mobility to understand they exist. If you are told tax is due in more than one country on the same income, then a fair question is to check how is that resolved. Is a foreign tax credit available? If you are told that there are payroll obligations in two countries it is fair to ask if there are payroll taxes on the same income that will be costly for you as an employer. Again, a fair question is whether a foreign tax credit (or something similar) is available to resolve the double payroll tax?The foreign tax credit is one of the ways in which double taxation is managed. There are other methods – exemption for example, but this is not covered here.
What is a certificate of coverage?
Social security is part of the payroll obligations that an employer has and usually consists of an employee and employer component. Like taxes, social security rates differ by country. It’s also important to note that in some countries social security is closely connected to the concept of pension and other related benefits so the ability for the employee to continue to pay into their home country social security system can be a key (and sometimes even an emotive) issue.When an employee from one country is sent to work in another country their compensation can be subject to social security taxes in both countries – so social security is due in the home and the host country (a double cost to the employee and the employer). To eliminate these dual costs a number of countries have signed agreements referred to as social security 'totalisation' agreements. The agreements usually clarify in certain situations the single country in which social security is due and provide a mechanism through which payments made in one country can be recognised in the country.In most agreements, if an employee is sent to work by their employer in another country for up to five years and they continue to be legally employed by the home country employer then home country social security only can be due.

There are a number of detailed considerations that also have to be checked and worked through. Once worked through, the employer and employee can then apply for a document called a Certificate of Coverage from the social security administration of the home country. This certificate of coverage serves as evidence that an employee, an employer, or even a self-employed worker is subject to home country social security and there is an exemption (in part or whole) from contributing to the social security system of the host country. From a payroll compliance perspective this document is absolutely key. The employer in the host country needs to be able to demonstrate the basis on which social security in the host country is not paid. Payroll audits by local tax/social security authorities often ask for copies of these certificates and in their absence can insist the host social security is paid (a double cost).Within Europe, the certificate of coverage concept is usually is governed as part of the European social security rules which can result in a different document called an A1. We will deal with this separately.
What is tax protection?
Tax protection is one of a few responses available to employers to help manage the challenge of differing tax and social security rates between countries. Different countries of course have different tax and social security rates so the net pay to the employee or assignees (after taxes) can change as they work in a new country. This change can become a barrier to mobility from an employee perspective as it adds complexity and uncertainty as well as changing net pay. We’ve discussed tax equalisation separately- this seeks to neutralise any differences – so the employee is no better or worse off. Tax protection, on the other hand, seeks to 'protect' against any increases only. Consequently, the employee can therefore be better off, but should not be worse off (from a tax perspective).For example, say the tax rate in the home country was 35% but it was 39% in the host country. In this case the employer would effectively settle the 4% extra tax under tax protection.

Similarly, if the tax rate in the host was 29% then no employer assistance would be required. This arrangement is usually deployed by employers where they recognise the tax differences issue, or there is double or multi-country taxation but they don’t want apply a tax equalisation approach. In theory, it also allows the employee to benefit from any local country tax breaks which can be an incentive to take up the assignment. Usually, tax protection is part of a gross pay approach (so employee settles the taxes due) and then a reconciliation can be prepared to review if tax protection has in fact been triggered. Sometimes these reconciliations are prepared as standard each year and other employers prefer to have them prepared 'on request' (employee has to request or they are prepared for certain employee categories only). Whilst this approach may seem like it is 'light touch' from an employer perspective my experience is it can actually get complex quickly. The tax is due by the employee so they usually become very focused on the amount and timing of taxes due in all locations to understand if they are worse off in any way. As a result, the requirement for line management /HR and expert support can increase.
What is tax equalisation?
Different countries have different tax and social security rates. If an employer sends an employee overseas for a work assignment, the new work location may result in different tax rates being applied so the take home pay after taxes could be different.

The purpose of a tax equalisation approach is to neutralise this and ensure that the employee is no better or worse off from a taxes perspective.

The approach usually (but not always) applies to stay at home compensation only. Personal and non-company income is usually (but not always) outside this arrangement.

The administration of the process involves the deduction of an estimated notional/ hypothetical tax from the employee. The actual taxes payable on company compensation then become payable by the employer. The estimated notional/hypothetical tax is then reconciled each year. Tax equalisation approaches enable and promote employee mobility.
What is a shadow/ modified payroll?
Payroll reporting obligations can be triggered for the employer when an employee starts working in a new country.

The employee could remain on the home country payroll so there isn’t a need to actually pay the individual in the host location but a payroll reporting obligation does still arise.

A shadow payroll, also known as a modified payroll, is used to then handle the payroll reporting obligation. It’s called a shadow payroll because whilst it does the reporting of the compensation and tax with-holdings to the local tax authority it doesn’t actually pay anything to the employee.   
What is a tax briefing?
Working in a new country can result in changes in the obligations that an employee has to tax authorities. There may be certain registrations required or new payments or filing responsibilities. A tax briefing is usually provided by an external tax service provider in the home and host country and allows the employee to understand the tax and social security implications of their move. As best practice, the tax briefing should be held before the employee leaves the home country.

The tax briefing will enable the employee to understand how they will be taxed and what actions they can take to minimise unwanted or avoidable tax liabilities. Where applicable, the home tax briefing would also usually cover the tax equalisation policy and process on behalf of the employer. The tax briefing provides the employer and employee with peace of mind that the employee would not inadvertently end up in non-compliance or trigger unwanted and unforeseen tax liabilities.  
What is a hypothetical tax calculation?
If an employee is working overseas under a tax equalised approach, an employer would normally prepare a calculation to determine the amount of tax that the individual would pay had they not gone on assignment. This calculation determines how much home country tax and social security is due on stay at home compensation – i.e. the earnings they would have had if the employee remained working solely in their home country. Any assignment related benefits or allowances such housing, schooling, cost of living or other assignment specific allowances would be excluded from the calculation.

The hypothetical tax would ideally be shared with the employee and is then deducted on a monthly basis from the employee. Hypothetical tax ensures that on stay at home compensation, the level of the tax deductions are broadly similar to the deductions the employee would have had before undertaking the assignment. 
US: State to state compliance
Intra-country mobility compliance
Mobility and tax professionals will be aware that as employees work across borders they may give rise to changes in compliance obligations such as payroll and income tax filings. What’s not always as well understood is that intra-country mobility can also do the same. Working in different places in the same country can change compliance obligations for the employer. In the UK, we have Scottish Income Tax as an example but the best example of this is probably the USA.US state to state complianceThe US Tax and payroll system works in two parts. There is Federal tax as well as State and Local Taxes often referred to as ‘SALT.’ If a domestic employee, or even a globally mobile employee, is working in more than one US city or state it can mean payroll and income taxes to those cities or states are triggered. Employers need a process to monitor where their employees are working to mitigate risk.Employees working outside of their 'home state' can give rise to payroll related compliance challenges for their employers as well as personally add to their own individual tax compliance burden … with a need to file extra state or city income tax returns. These employees are 'non-resident' because although they work in one state they live in another. As businesses expand, using 'just in time' service delivery methodology and broaden the use of flexible work arrangements, the employers’ vulnerability to payroll tax compliance gaps grow.
Why is State Payroll Tax so complicated?  
Well, let’s start with the 50 state jurisdictions plus the District of Columbia.D.C. does not tax non-residents and nine states do not impose individual income tax on wages  which leaves us with 41 state tax jurisdictions that apply their own sets of rules to non-resident taxation.The rules then vary from taxation on day one as applied by 24 states … to taxation based on the number of days per individual, the number of days by legal entity or varying wage thresholds to be applied to an employee in a quarter or calendar year. Once you have these rules sorted out, we then have to consider the Reciprocity agreements between certain states to see if there is an overriding agreement  that presents taxation to the 'resident' or 'home' state.  Now that you get the gist of the rules, or at least how complex they can be – let’s look at implementation.For a select few sectors that use time and attendance/ timesheet systems (like professional services) then perhaps daily physical work location details are readily available? If so, it’s then a matter of applying the rules for each of your employees. Alternatively, if the physical work location data does not exist, alternatives include employee self-reporting, analysis of preferred or travel suppliers’ data as well as GPS smart phone related apps that can help facilitate the process. Gather the data, apply the tax rules and then integrate with company policies that reflect your corporate culture.While today’s rules combined with the expanded use of a mobile workforce present payroll tax compliance challenges there are cost effective solutions for employers to mitigate their compliance risk. Another key point is having a solution in place to track employees’ workdays can of course can enable compliance but it can also be proactively used to prevent that same compliance from being triggered.

Note: The Mobile Workforce State Income Tax Simplification Act of 2019 was reintroduced with bipartisan support last week with the aim to universally apply a 30-day taxing threshold for non-residents working outside of their home state. Similar legislation aimed at State Tax Simplification was introduced in 2007, 2009, 2015 and 2017. 
What are foreign tax credits?
For some, this is an area where just the mention of it can start to cause confusion. I am hoping therefore this is a useful write up. First of all, I will mention that often an abbreviated form - just FTC is used. Tax experts often refer to foreign tax credits as ‘FTCs.’So what are FTCs and why do they occur?When employees work across borders they may trigger taxation in more than one country – the home as well as the host country (for example). Let’s call home (Country A) and host (Country B). When taxation has been triggered in both countries income tax may become payable in both locations. It is not uncommon that one of the two countries (say Country B) taxes all of the income including the income taxed in Country A. In effect we have what is known as double taxation. Income tax is due on the same income in two different countries. Income tax is due in Country B on everything and in Country A as well (usually on a smaller portion of the income).Double taxation, of course, would be unfair and would be very costly and demotivating to globally mobile employees. In a number of scenarios, such as where tax equalisation applies, the tax liabilities are transferred to the employer. This double taxation then becomes a potential cost to the employer.Tax systems recognise that double taxation would be unfair. For example, if Country B charged tax of 25 on income of 50 and then Country A charged tax of 15 (on that same income of 50), then we have total tax of 40 or a tax rate of 80%. In response to this tax systems usually provide some mechanism to remedy this double taxation. One such mechanism is foreign tax credits. Where allowed, a country would compute the tax liability due but then give a “credit” for the tax paid in the other location.Developing the example we had earlier:Country B tax is 25Country A tax is 15Country B tax due is 10, (25 -15).Country B has given a “foreign tax credit” so that the Country B tax due is reduced and double taxation is remedied. It’s not exactly this simple as the workings and calculations are significantly more complex and involved but this illustrates the point,Foreign tax credits are quite common in the area of mobility because often tax is driven by economic activity (as one example) and the employee is working in more than one country. Another cause can be compensation that is earned over multiple years – bonuses or equity compensation as examples. The employee may have worked in more than one country during the period to which these earnings relate so more than one country taxes and one of the countries taxes it all.The double taxation issue can also be very relevant for payroll, after all no employer wants to pay payroll taxes on the same income in more than one country. Tax experts usually find ways of resolving this but it requires detailed knowledge of local and cross border payroll and mobility taxes.In general, foreign tax credits are usually best left to be managed by tax experts as they can get complex quickly. That said, it is important for those working in the area of mobility to understand they exist. If you are told tax is due in more than one country on the same income, then a fair question is to check how is that resolved. Is a foreign tax credit available? If you are told that there are payroll obligations in two countries it is fair to ask if there are payroll taxes on the same income that will be costly for you as an employer. Again, a fair question is whether a foreign tax credit (or something similar) is available to resolve the double payroll tax?The foreign tax credit is one of the ways in which double taxation is managed. There are other methods – exemption for example, but this is not covered here.
What is a certificate of coverage?
Social security is part of the payroll obligations that an employer has and usually consists of an employee and employer component. Like taxes, social security rates differ by country. It’s also important to note that in some countries social security is closely connected to the concept of pension and other related benefits so the ability for the employee to continue to pay into their home country social security system can be a key (and sometimes even an emotive) issue.When an employee from one country is sent to work in another country their compensation can be subject to social security taxes in both countries – so social security is due in the home and the host country (a double cost to the employee and the employer). To eliminate these dual costs a number of countries have signed agreements referred to as social security 'totalisation' agreements. The agreements usually clarify in certain situations the single country in which social security is due and provide a mechanism through which payments made in one country can be recognised in the country.In most agreements, if an employee is sent to work by their employer in another country for up to five years and they continue to be legally employed by the home country employer then home country social security only can be due.

There are a number of detailed considerations that also have to be checked and worked through. Once worked through, the employer and employee can then apply for a document called a Certificate of Coverage from the social security administration of the home country. This certificate of coverage serves as evidence that an employee, an employer, or even a self-employed worker is subject to home country social security and there is an exemption (in part or whole) from contributing to the social security system of the host country. From a payroll compliance perspective this document is absolutely key. The employer in the host country needs to be able to demonstrate the basis on which social security in the host country is not paid. Payroll audits by local tax/social security authorities often ask for copies of these certificates and in their absence can insist the host social security is paid (a double cost).Within Europe, the certificate of coverage concept is usually is governed as part of the European social security rules which can result in a different document called an A1. We will deal with this separately.
What is tax protection?
Tax protection is one of a few responses available to employers to help manage the challenge of differing tax and social security rates between countries. Different countries of course have different tax and social security rates so the net pay to the employee or assignees (after taxes) can change as they work in a new country. This change can become a barrier to mobility from an employee perspective as it adds complexity and uncertainty as well as changing net pay. We’ve discussed tax equalisation separately- this seeks to neutralise any differences – so the employee is no better or worse off. Tax protection, on the other hand, seeks to 'protect' against any increases only. Consequently, the employee can therefore be better off, but should not be worse off (from a tax perspective).For example, say the tax rate in the home country was 35% but it was 39% in the host country. In this case the employer would effectively settle the 4% extra tax under tax protection.

Similarly, if the tax rate in the host was 29% then no employer assistance would be required. This arrangement is usually deployed by employers where they recognise the tax differences issue, or there is double or multi-country taxation but they don’t want apply a tax equalisation approach. In theory, it also allows the employee to benefit from any local country tax breaks which can be an incentive to take up the assignment. Usually, tax protection is part of a gross pay approach (so employee settles the taxes due) and then a reconciliation can be prepared to review if tax protection has in fact been triggered. Sometimes these reconciliations are prepared as standard each year and other employers prefer to have them prepared 'on request' (employee has to request or they are prepared for certain employee categories only). Whilst this approach may seem like it is 'light touch' from an employer perspective my experience is it can actually get complex quickly. The tax is due by the employee so they usually become very focused on the amount and timing of taxes due in all locations to understand if they are worse off in any way. As a result, the requirement for line management /HR and expert support can increase.
What is tax equalisation?
Different countries have different tax and social security rates. If an employer sends an employee overseas for a work assignment, the new work location may result in different tax rates being applied so the take home pay after taxes could be different.

The purpose of a tax equalisation approach is to neutralise this and ensure that the employee is no better or worse off from a taxes perspective.

The approach usually (but not always) applies to stay at home compensation only. Personal and non-company income is usually (but not always) outside this arrangement.

The administration of the process involves the deduction of an estimated notional/ hypothetical tax from the employee. The actual taxes payable on company compensation then become payable by the employer. The estimated notional/hypothetical tax is then reconciled each year. Tax equalisation approaches enable and promote employee mobility.
What is a shadow/ modified payroll?
Payroll reporting obligations can be triggered for the employer when an employee starts working in a new country.

The employee could remain on the home country payroll so there isn’t a need to actually pay the individual in the host location but a payroll reporting obligation does still arise.

A shadow payroll, also known as a modified payroll, is used to then handle the payroll reporting obligation. It’s called a shadow payroll because whilst it does the reporting of the compensation and tax with-holdings to the local tax authority it doesn’t actually pay anything to the employee.   
What is a tax briefing?
Working in a new country can result in changes in the obligations that an employee has to tax authorities. There may be certain registrations required or new payments or filing responsibilities. A tax briefing is usually provided by an external tax service provider in the home and host country and allows the employee to understand the tax and social security implications of their move. As best practice, the tax briefing should be held before the employee leaves the home country.

The tax briefing will enable the employee to understand how they will be taxed and what actions they can take to minimise unwanted or avoidable tax liabilities. Where applicable, the home tax briefing would also usually cover the tax equalisation policy and process on behalf of the employer. The tax briefing provides the employer and employee with peace of mind that the employee would not inadvertently end up in non-compliance or trigger unwanted and unforeseen tax liabilities.  
What is a hypothetical tax calculation?
If an employee is working overseas under a tax equalised approach, an employer would normally prepare a calculation to determine the amount of tax that the individual would pay had they not gone on assignment. This calculation determines how much home country tax and social security is due on stay at home compensation – i.e. the earnings they would have had if the employee remained working solely in their home country. Any assignment related benefits or allowances such housing, schooling, cost of living or other assignment specific allowances would be excluded from the calculation.

The hypothetical tax would ideally be shared with the employee and is then deducted on a monthly basis from the employee. Hypothetical tax ensures that on stay at home compensation, the level of the tax deductions are broadly similar to the deductions the employee would have had before undertaking the assignment.